A guide through the maze of mutual funds
There are about 1,000 schemes to choose from; finding a starting point is tough. That is where Mint50 comes in
Even though the start of a calendar year is a good time to wipe the dust off your investment portfolio, we believe that any time in a year is good enough, especially if you haven’t already started investing. But a starting point is often a tough spot if you have too many options.
Take a look at the 12-trillion Indian mutual funds (MF) industry. There are 2,318 MF schemes. Of these, about 1,000 are fixed maturity plans (FMPs) that you can just strike off your list if you’re wondering where to start putting your money. Close to 130 schemes are liquid in nature; that’s where you park your money temporarily—a sort of substitute to your savings bank account—till you find a more permanent place to invest. That leaves close to 520 fixed income schemes and an equal number of equity funds. Still, 1,000 is a big number to choose from if you wish to have just five-eight schemes in your portfolio. That’s where Mint50 comes in.
In January 2010, we ran a fine toothcomb through the entire universe of MF schemes, across categories, to bring to you our curated list, after carefully assessing performance, fund managerial outlook, style, consistency and other such factors. So, how have we done so far?
We checked the performance of all schemes across a five-year period. Of the 50 schemes that are a part of Mint50, five are index and exchange-traded funds. These are passively managed funds that mimic their benchmark indices, both in terms of where they invest and how they perform. There is a scheme that is still less than five years old. Of the remaining 44, 84% outperformed their category averages. Of the schemes against whom we could assign an appropriate benchmark index, 97% of the schemes outperformed the indices.
But the past two years have been volatile for the Indian equity market. In 2013, on the brink of bad economic conditions and an impending general election that was to come in 2014, we got the first hints of what could be the possible outcome of the elections. Broad indices started to look up and the S&P BSE Sensex gained 9% in 2013.
The momentum continued in 2014, as markets shot up, taking with them many mid- and small- sized companies. While the Sensex returned 30% in 2014, S&P BSE MidCap returned 55%. However, while markets continued their run-up, things were slow to take off on the ground. Consumer demand was tepid and companies’ poor results continued. Eventually, things caught up in 2015 and markets fell. So far this year, Sensex has managed a gain of just about 3%.
Meanwhile, retail investors continued to come into equity funds. According to data by the Association of Mutual Funds of India (Amfi), retail folios in equity funds grew to 33.8 million as on end of June 2015, up from 31.3 million as on March 2014, a growth of 6% on a compounded basis. In the same period, equity folios held by high net worth individuals (HNIs) rose by 81%, from 390,000 to 819,000. Much of the rise in the HNI folios is said to have come into arbitrage funds to get the benefits of dividend and bonus stripping and also, say industry experts, a shift from short-term debt schemes to gain the equity tax advantage. But since the bifurcation is not available, we can’t confirm the exact amount.
If you have already been investing in MFs using Mint50, a half-yearly review is just the thing you need right now. In this edition, two schemes move out and two new ones replace them. There’s a key manager change at IDFC Premier Equity Fund, so we’ve taken that up separately.
Read on to find out if your scheme is still in the list or whether you need to make a change.
What’s In
EDELWEISS ABSOLUTE RETURN FUND
Edelweiss Absolute Return Fund (EARF) uses a combination of equity stocks, derivatives and business opportunities, such as buy-back of shares and other corporate actions, to generate returns. The main objective is to get positive absolute returns, while at the same time minimize volatility using these strategies.
EARF aims to capture at least 50-60% of the upside when the market rallies and if the trend is downward, the endeavour remains to deliver a positive return. We checked the fund’s returns to see if it has achieved its objective. Between January 2010 (its launch) and now, the scheme has achieved its objective 89% of the times, based on one-year daily rolling returns.
“This is a low-volatility fund which is unique in it’s endeavour to capture a high proportion of the upside of the CNX Nifty while limiting the downside significantly. This is done by keeping fund volatility low. Over the past few years, the fund has managed to outperform the Nifty with almost a third of the volatility associated with it," said Vikaas Sachdeva, chief executive officer, Edelweiss Asset Management Ltd. Although the fund’s benchmark is Crisil MIP Blended Index, it is often categorized as a balanced fund. However, its hedging strategy makes it more conservative than a balanced fund in which equity exposure is usually between 65% and 75%. Hence, bunching it with such funds isn’t accurate.
Let us now take a look at how the fund holds up when markets correct. Between August 2011 and July 2012, the daily annual rolling return for the Nifty was consistently negative with the downside being as high as about -24.5%. EARF, during this period, had negative returns (daily one-year rolling returns) only a few times with the maximum downside limited to around 4.4%. This shows that the arbitrage opportunities and derivative hedging helps in limiting downside when markets fall.
The flip side though is that when markets rise, this fund doesn’t exactly burn the charts. Returns can be subdued as compared with those that invest their entire corpus in equities. The fund compliments an existing portfolio of equity funds, as the returns aren’t too correlated with diversified equity funds.
The fund is not meant for everyone. There are multiple strategies running in the fund and you need to understand them all before investing. For a regular equity mutual fund investor, who wants to compliment an existing portfolio with a less volatile option, this is a good fund. Downside protection is aimed for, but there’s no guarantee. Over the past five years, the fund has successfully demonstrated its ability to meet the underlying absolute return objective with minimum volatility. And such performance, we feel, warrants an inclusion in the Mint50 list of funds.
HDFC SHORT TERM FUND
We may debate as to when the turnaround of the Indian economy will eventually happen, but most market experts say it’s coming. That is also one reason why debt funds are taking their chances and investing in slightly lower-rated scrips with the hope that as the economy improves, their credit rating will improve and thereby their stock prices. We don’t wish to include corporate bond funds in Mint50 as that is more a strategic call. These funds use the accrual strategy (making gains using credit risk) to the hilt. But we could look at funds that take a little bit of credit risk. HDFC Short Term Fund (HSTF) is one such scheme.
HSTF typically invests in bonds but dabbles in government securities when the spreads (difference in yields between corporate bonds and government securities) are low. Its duration is about 640 days as per data provided by Value Research. The fund invests about 25% in AAA rated securities, and about 5% in unrated securities. “Close to 5-6% lie in assets that are rated A-," said Anil Bamboli, fund manager, HDFC Asset Management Co. Ltd. The lowest the fund can go to in terms of credit rating is scrips rated A-, he added. But low-rated scrips don’t automatically appeal to HSTF. The capacity of a company to repay its debt and the management’s character are important, said Bamboli. Its corpus is over 2,500 crore and its expense ratio is 1.07%. The fund house relies on external ratings but places a lot of emphasis to its internal ratings as well.
HSTF comes with strong performance and has consistently been in the top quintile in its category of short-term bond funds.
What’s out?
DSP BLACKROCK TOP 100 FUND
DSP BlackRock Top 100 Fund (DT100) has been a ‘satellite’ scheme in Mint50 for a long time. It finally goes out. In the past five years, it returned just 10.67%, slightly underperforming the category that gave 10.94% on an average and marginally over its own benchmark S&P BSE 100 index that returned 9.1%. Apoorva Shah, who has been its fund manager for many years, does not manage the fund any more and will now manage BlackRock’s offshore funds that invest in India. Harrish Zaveri, who also heads the fund house’s equity research desk, will now manage DT100.
DT100 went through a rough patch in 2013 because it expected the market to recover in the first half and the fund was repositioned accordingly. Some of its stock calls, like its holding in Infosys Ltd, also went wrong and hurt its performance. Later that year, the fund’s portfolio turned towards more defensive stocks. The fund did recover a bit in 2014 but pales in comparison with some of its peers. Although Zaveri is confident of the fund’s current portfolio and its future prospects, he says he will churn the portfolio much lesser than before. “I expect the portfolio to be stable. I am not an active trader and we won’t see frequent churning in the portfolio just because a stock goes up by some percentage points," said Zaveri. On the contrary, Shah’s style was very active as he felt that’s the way a large-cap fund, such as DT100, can be distinguished from its peers, all of whom track large-sized companies where information is very easily available. According to Value Research, the scheme’s top three sectors are financials (33%), automobiles (14%) and energy (13.5%). DT100 moves out of Mint50 as its peers come with better track records.
DWS SHORT MATURITY FUND
Presence of better alternatives is the reason why DWS Short Maturity Fund (DSMF) moves out. This is a short-term bond fund that invests in bonds and short-term debt instruments and aims to cater to investors who want to invest for a period of up to about three years. At present, DSM’s portfolio duration is just under three years.
The fund has performed reasonably well over the past year or so. It takes a mix of duration (making gains using interest rate movements) and accrual (making gains using credit risk) strategies. “In a falling interest rate scenario, the fund’s average maturity moves in the range of 2.5–3.5 years and is presently hovering around three years," said Nitish Gupta, fund manager, Deutsche Asset Management (India) Pvt. Ltd. The fund usually does not invest in scrips rated below AA.
The fund’s size is comfortable at 2,000 crore, and according to Value Research, it’s expense ratio as on March 2015 was 1.12%. DSMF is not a bad fund and so existing investors, who had invested in it with a maturity of not more than two or so years, should continue. But in light of a potential recovery of the economy, we felt the need to include a fund with a slightly higher credit risk. So DSMF moves out.
Lisa Pallavi Barbora contributed to the story.
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